PUBLICATIONS & REPORTS

Contents Introduction

We develop a model of the allocation over countries of gross fixed capital formation by multinational firms. We test the predictions of the model on survey data for Japanese multinational firms in 1996, using fixed capital investment data contained in the Survey of Trends in Business Activities of Foreign Affiliates conducted by the Ministry of Economy, Trade and Industry (METI). Examining 605 fixed capital investment decisions at the firm and country level, we find that investment rates are positively affected by the firms’ global return on assets, while higher wages relative to wage levels in other countries reduce investment rates. Relative country risk similarly reduce investment rates, while relative output growth at the industry and country level has a positive impact only on investments in Asia. The sensitivity of investment rates to the country’s relative performance in terms of output growth, wages, and risk is found to be substantially greater for Asia than for other countries.